Addressing threats to health care's core values, especially those stemming from concentration and abuse of power. Advocating for accountability, integrity, transparency, honesty and ethics in leadership and governance of health care.

McKesson Corp, one of top U.S. drug wholesalers, has agreed to pay more than $190 million to settle claims that it had violated the federal False Claims Act by reporting inflated pricing information for many prescription drugs, causing Medicaid to overpay for them.

The settlement was announced Thursday by U.S. Attorney Paul Fishman in New Jersey.

According to the government, McKesson reported inflated pricing data to First DataBank, a publisher of drug prices that most state Medicaid programs use to set payment rates for pharmaceutical products.

The government accused McKesson of marking up prices on a variety of drugs by 25 percent between Aug. 1, 2001, and March 31, 2005.

It said McKesson's conduct had caused the United States and individual states to pay inflated reimbursements on Medicaid claims submitted between Aug. 1, 2001 and Dec. 31, 2009.

'We have no tolerance for those who take advantage of that system to bring in more business by falsely increasing reimbursements to retailers,' Fishman said in a statement.

As is typical, the company denied doing anything wrong:

McKesson was not immediately available to comment.

According to settlement papers, McKesson 'expressly denies' the government's charges, as well as those of a whistleblower, David Morgan, in a related civil lawsuit filed in New Jersey federal court. The San Francisco-based company did not admit liability or wrongdoing in agreeing to settle.

It was hardly McKesson's first ethical problem.

McKesson's Track Record

This is just the latest in a long series of legal problems for this company.

The Depression-Era Scandal

Way back in 1938, there was the McKesson & Robbins scandal, one of the major scandals of the depression era. The company had been taken over by one Philip Musica, an accused bootlegger, who committed suicide before a trial (see this post).

In this century, there were:

The Securities Fraud Case

As we posted in 2009, five former executives pleaded guilty, the former CEO and Chairman Charles McCall was convicted of fraud in 2009. The company settled investor lawsuits in 2005 for $960 million.

McKesson Corp., a giant drug-wholesale and -distribution company, agreed to pay $350 million to settle cases in which it was accused of helping to increase drug prices in 2001 and 2002. The money will go to health plans that pay for drugs and consumers who paid co-pays for their medicines.

The San Francisco-based company said the settlement, which is subject to court approval, includes 'an express denial of liability of any kind' but that it decided to settle the cases to avoid the uncertainty of litigation

In addition, as we noted here, the company settled with the state of Connecticut for "illegal and deceptive" pricing practices for a mere $15 million.

These settlements appear to be precursors of the just announced one.

The Propofolol Punitive Damages

As we noted here, McKesson was one of three companies to collectively pay $162 million in punitive damages in a case involving allegations that the companies sold propofolol, an injectable anesthetic, in reusable containers that were susceptible to contamination with the hepatitis C virus.

The Best-Paid CEO in America

All these legal issues notwithstanding, late in 2011, McKesson leadership made headlines for a different reason. Based on one method of computation, the company's CEO was the best-paid of an exceedingly well-paid 2011 CEO class. An article in the Daily Beast noted:

John Hammergren, [is] the CEO of the McKesson Corp., a giant medical-supply company in California. Hammergren is the $145 million man, top dog on the latest listing of the country’s highest-paid chief executives.

The details of the compensation package included,

Yet last year McKesson contributed more than $13 million just to Hammergren’s pension, according to company documents. Among the other perks he enjoys: a chauffeur to drive his company car, free use of the corporate jet for personal travel, and an extra $17,000 a year to pay for a financial planner because handling all those hundreds of millions is no doubt complicated stuff.

Also,

Then there are the assorted perks he gets each year at an annual cost of $1 million or so. Choose the perk that makes you the most jealous. Maybe it’s this line found in McKesson’s most recent proxy statement: 'For security, protection, and privacy reasons, the Board has directed our CEO to use the corporate aircraft for both business and private travel.' Or maybe it’s the bounty that awaits Hammergren on the other side of his retirement. The company discontinued its pension program for ordinary employees in 1997 but not for top executives. If Hammergren quit tomorrow, according to company filings, he would receive a pension valued at $125 million.

The party won’t stop once the 52-year-old Hammergren retires. Among his lifetime benefits: a personal assistant and office, which the company figures will cost more than $200,000 a year, and the services of a financial counselor—a perk that will eat up $350,000 in profits, according to company estimates. The goodies keep coming even after he dies. If his wife survives him, she will continue receiving his base salary for six months and will also get $2 million in cash. That cash bonus would actually cost the company nearly twice that amount, as it's promised to cover the widow’s cost of paying taxes on that money.

And then there’s a provision so outsize it’s drawn the attention of corporate-governance watchdogs like GMI, the research group that put Hammergren in the top spot of its latest survey of CEO salaries. If Hammergren loses his job due to a change in ownership, he receives an immediate $469 million payout, GMI found—giving him perverse incentive to see it happen.

Although Mr Hammergren has not been the best paid CEO every year, the Daily Beast article showed how much he has made over the years:

Hammergren’s annual total compensation payouts, taken from the company’s public filings with the Securities and Exchange Commission: $46 million in 2011; $55 million in 2010; $37 million in 2009; another $41 million in 2008. Hammergren hadn’t founded the company. Wall Street analysts covering McKesson can tell you of the disappointments and miscues that have marked his tenure. But his haul in the 13 years he has been running McKesson? More than $500 million, according to data provided by Equilar, an executive-compensation data firm.

It then contrasted this consistent largess, spiced with the 2011 results, with the company's long-term financial performance. After the scandal that eventually resulted in crimincal convictions for some McKesson executives:

'They had to give the CEO job to somebody, and basically he was the last man standing,' said an analyst who has been covering McKesson and its competitors since the 1990s. Many in the industry had never heard of Hammergren when he took over as president and co-CEO in 1999, this analyst said, 'but I guess it’s better to be lucky than good.' Hammergren became sole CEO in 2001.

McKesson’s stock had hit a high of just under $95 a share but fell below $20 after the scandal broke. Hammergren deserves credit for stabilizing the company—some might even say he rescued McKesson—but a long-term shareholder could be forgiven for feeling that the company’s board of directors has been overly generous to its chief executive. As of Friday, the stock was trading at $78 a share—still off its 1998 high. Factoring in the regular dividends the company has paid over the years, a shareholder’s investment would be worth slightly more than it was 13 years ago.

Summary

So Mr Hammergren's corpulent compensation is vastly out of proportion not only to the company's woeful ethical performance, but also to the long-term wealth created for its owners, that is, its shareholders.

So McKesson provides just the latest example of how the top hired leaders of health care organizations seem to monumentally prosper no matter how badly their organizations fare in terms of ethical performance, good done for patients and health care, or long-term financial performance. (See recent examples here and here, and our posts on executive compensation here.) As we quoted a McGill economics professor who was writing about the global financial collapse, "all this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."

To truly reform health care, we must stop this compensation madness. We must make health care leaders accountable for their organizations' effects on patients' and the public's health, and make sure they get reasonable, not royal compensation reasonably related to their organizations' performance, including ethical performance.

Like hospitals and doctors everywhere, Banner Health fights a daily battle to get paid by insurance companies and government agencies for the care it delivers. So the hospital system hired a company called Executive Health Resources to fight back against the likes of Medicare and UnitedHealthcare when they deny claims or pay bills for less than what Banner thinks it is owed.

Fair enough.

But Banner executives began to worry about EHR’s independence when the
firm was acquired in 2010 by UnitedHealth Group, UnitedHealthcare’s
parent.

Issues can get a bit sticky under such an arrangement.

I put it this way:

Critics call United’s ownership of EHR a troubling conflict of interest
that could give it confidential information about rivals as well as
patients and limit EHR’s power to demand payment from its much larger
corporate sister. “How is that ownership going to affect the mission of a
company whose business is to extract more money from payers?” said Scot
Silverstein, a physician and specialist in medical software and patient
records at Drexel University. “Imagine going to a plaintiff’s lawyer to
take your malpractice case and not knowing that plaintiff’s lawyer
actually works for the hospital that you’re suing.”

When payers acquire those who would challenge their payment denials, I worry about the consolidation of power being too great for the public good.

As we learn, the relationship is somewhat stealthy:

... There is no mention of EHR’s ownership in the “Corporate Overview”
section of its Web site or elsewhere on the site. Nor did the American
Hospital Association identify EHR as a United subsidiary in September
when it renewed its exclusive endorsement of EHR’s denial-fighting
services. EHR pays the hospital association a fee for the endorsement.
The group declined to disclose the amount.

The plot thickens:

Claims consultants such as EHR typically gain access to millions of
patient records and confidential contracts between hospitals and
insurers, industry officials say. If UnitedHealthcare, United’s
insurance wing, gained access to that data, it would obtain “a huge
business advantage” over insurance rivals as well as the hospitals,
Kofman said.

In today's healthcare business environment, "if" seems to me to be optimistic.

Hancock goes further in the article:

As insurers eager to add revenue streams convert themselves into
diversified health-services companies, they often buy traditional
business adversaries, including physician groups and hospital
consultants such as EHR. They’re also buying technology companies and
research firms that serve medical-care providers, raising questions not
only about independence but about the privacy of patient information.

A Georgetown professor, formerly a state insurance superintendent, gets to the heart of the matter, using United as but one example:

“I am not convinced that, even with proper disclosure, that an entity
owned by United could aggressively advocate against United’s interests,”
said Mila Kofman, a Georgetown professor who was Maine’s insurance
superintendent.

This factoid is eye-opening:

Appealing claims denials has become a huge, high-tech business,
reflected in the more than $1 billion that United reportedly paid for
EHR [Executive Health Resources].

You might think there were better things to do with $1 billion besides administrative bloat - such as taking care of patients.

We probably need new laws to catch up with the flurry of M&A's going on in healthcare between payers, the healthcare delivery sector, and the "referees" that mediate between them when disputes arise.

Read the entire article at the WaPo link above. The examples get even more convoluted.

-- SS

Addendum:

Roy Poses notes:

This appears to be a newly recognized type of conflict of interest that
contributes to the concentration of power in the US commercialized
health care system. While many people tout how our health care system
is "competitive" and a "free market," it is ever more dominated by a
decreasing number of enlarging organizations. True health care reform
would break up health care oligopolies.

Accretive Health Inc. (AH), a hospital
billings-collection company, said it’s working with advisers to
address concerns raised by the Minnesota attorney general’s
office that it puts bedside pressure on patients to pay bills.

The claims “grossly distort and mischaracterize” its
revenue cycle services, the company said today in a statement.
The suggestion Accretive puts bedside pressure on patients to
pay their bills out of pocket are a “flagrant distortion of
fact,” the company said.

... Accretive shares tumbled by the most ever on April 25, just
after Minnesota Attorney General Lori Swanson issued a report
alleging Accretive violated U.S. and state patient-privacy and
debt-collection laws. She said patients at Fairview Health
Services, a Minnesota hospital chain, were pressured for payment
before they received care in some cases and that Accretive’s
debt collectors didn’t properly disclose their role. Swanson
filed a lawsuit on Jan. 19 against Accretive.

Chicago-based Accretive said in today’s statement it
doesn’t deny access to patient care and the allegation is
“flatly untrue.”

There appears to be something to the allegations, though...

Credit Scores

[Minnesota Attorney General ] Swanson said last week employees at Fairview, a nonprofit
chain of seven hospitals based in Minneapolis, were required to
use a computer system derisively called “Blue Balls” to track
whether patients paid their bills. The payment system began
after Fairview hired Accretive in May 2010, Swanson said in her
report describing the companies’ relationship.

Actions that Accretive used at Fairview included issuing
emergency room employees “scripts” for conversations with
patients that “can lead a patient or her family to believe the
patient will not receive treatment until payment is made,”
Swanson said.

Employees were instructed to ask for credit card payments,
tell patients they’d wait for them to retrieve their checkbooks
from their cars, or if the patients said they couldn’t pay,
remind them that debt-collection activities “can affect your
credit score,” according to the scripts.

Considering the setting, that sounds like a technique more suited for a movie about mid-30's Chicago then a 21st century hospital. It seems a not so subtle form of strong-arming someone when they're down.

Accretive said late on April 27 that Fairview had canceled
its contract with them, adding it didn’t know yet how the
cancellation would affect its business. Accretive said it would
provide an update on its May 9 quarterly financial call.

Federal law prohibits hospitals from denying emergency care
to anyone, regardless of their ability to pay.

While no statement is made in this article about care denial, Federal law should prohibit strong-arm tactics and psyops at a time when patients are most vulnerable. The unpleasantness and added stress are certainly not good for outcomes in the vulnerable.

I didn't include security of data from placement into /dev/null (that is, destruction).

There's this email, received by East coast physicians not long ago from a claims processing company (identities redacted):

Dear Provider,

As you may be aware, we experienced a significant problem with our computer system during a software maintenance function on XX/XX/2010.

In addition to the network issue, we discovered that the redundant back-up systems were not operating as reported. ["Reported" when, and by whom, one wonders? - ed.]

We had two on-site back-up systems that were monitored daily and which were historically reported as successful. We have since learned that these internal back-up functions were not operating as reported and the on-site back-ups were not entirely successful. [Meaning, they were not successful, period - ed.]

Also, our software vendor, [major EHR vendor], was providing two additional remote back-ups on servers located in [city, state] and [city, state]. [EHR vendor] has informed us that these remote back-ups were not initiated as represented. [Meaning, they screwed up - ed.] Therefore, when our computer network system malfunctioned, there was no readily available back-up data on-site or at the remote redundant back-up servers.

Please be aware that we have replaced hardware components and were able to recreate the data bases and we are billing. However, we are still unable to access data that was stored on our servers prior to XX/XX/2010.

[EHR vendor] is diligently working to retrieve the data from the hard drives, back-up tapes, and through other means. Please be assured that all files will be restored, if the files cannot be fully restored electronically, then they will be fully restored manually.

At [our claims processing company], we are truly saddened by the fact that we have disappointed clients and we sincerely apologize for any inconvenience experienced by you, your staff, or your patients.

We have always appreciated your loyalty as a valued client and will continue to keep you informed of the progress.

The levels of information technology and data management incompetence exhibited in this message are stunning.

The confidence it imparts regarding the safety of our critical medical data from destruction, and its availability when truly needed, is less than stellar.

A major problem is that the health IT industry has no accountability.

I believe the Food, Drug and Cosmetic Act needs to be amended to become the "Food, Drug, Cosmetic, and Cybernetic" Act.

Tenet Healthcare Corp has agreed to pay almost $43 million to settle allegations that it overbilled the federal Medicare healthcare program for treating patients at certain rehabilitation facilities, the Justice Department said on Tuesday.

The company was accused of improperly billing Medicare between May 2005 and December 2007 for treating people at inpatient rehabilitation facilities when they did not qualify for such an admission, the Justice Department said.

Tenet agreed to $42.75 million to resolve the allegations, which were made under the U.S. False Claims Act. Medicare is the federal healthcare program for the elderly.

While this story appeared briefly and without context in a few business news outlet, it really is part of a much bigger picture.

National Medical Enterprises

Published in 2006, Maggie Mahar's Money Driven Medicine was one of the important early works on health care dysfunction (see post here, the web-site of the documentary film based on it here). One of the striking cases it discussed was that of Nartional Medical Enterprises. NME was charged not only with run of the mill offenses like over-billing, but more exotic ones like kidnapping patients. NME eventually settled with federal authorities in 1994 for $379 million, and pleaded guilty to a variety of charges. The results were similar to many more recent cases. No one went to jail, and the CEO walked away with a golden parachute. Despite the seriousness of the offenses, NME did not go out of business. It simply changed its name - to Tenet Healthcare.

Legal Problems in the 21st Century

The "new" Tenet continued to have legal issues. These included a $395 million settlement of the Redding Medical Center unnecessary heart surgery scandal in 2004 (look here), and a $21 million settlement of US government charges of kickbacks (look here), a $7 million settlement with the government of Florida of charges of fraudulent billing (look here), and a $900 million settlement of federal over-billing complaints (look here, and see our post here), all in 2006. There was an apparent lull, and then in 2011 the company settled a class action suit brought after the deaths of 34 patients in a Tenet facility in New Orleans after Hurricane Katrina (see Bloomberg story here.)

Again, while this substantial string of settlements suggest a pattern of repeated misbehavior, as in many other legal resolutions in health care (look here), the cost of financial penalties was diffused across the organization. No individuals seemed to suffer any negative consequences from any of these episodes.

No Consequences for Hired Managers

Instead, despite this evidence of repeated misbehavior, now extending over nearly 20 years and across two centuries, the top hired leaders of Tenet continued to flourish. Earlier this month Becker's Hospital Review announced the compensation received by Tenet's CEO in 2011:

Total compensation for Trevor Fetter, president and CEO of Dallas-based Tenet Healthcare, dropped 12 percent from 2010 to $10.74 million in 2011, according to documents from the U.S. Securities and Exchange Commission.

Mr. Fetter's base salary in fiscal year 2011 was $1.08 million, the same as the previous two years. He received $4.88 million in stock awards, $2.67 million in non-equity incentive plan compensation and $1.93 million of accumulated benefits under his supplemental executive retirement plan. Mr. Fetter also received more than $142,000 for personal use of Tenet's aircraft.

Despite the small dip last year, Mr Fetter's total compensation has generally increased over the years, from $6.12 million in 2003 (via the LA Times), to $9.7 million in 2008 (AP via Fox News).

Summary

One would think that Tenet's record of legal trouble would have turned it into a pariah, or led to its corporate demise. However, like many other large health care organizations, the organization has been able to shrug off evidence of a deeply flawed culture, and within such a culture, its leaders have continued to enrich themselves with seeming impunity.

Such cases should raise many questions - Why are repeated offenses by the same well known health care organizations barely considered news? Why do repeat offenses not generate at least increasing financial penalties? Why do the organizations' stake-holders, particularly as represented by their boards, not show more concern? Why has the regulation of health care organizations devolved into Kabuki theater?

So, I once again insist, to really deter bad behavior, those who authorized, directed or implemented bad behavior must be held accountable. As long as they are not, expect the bad behavior to continue. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

On Thursday, the healthcare information technology provider
reported a lower-than-expected quarterly profit and also announced the
resignation of its CFO, three directors and board Chairman Phil
Pead.

Citigroup analyst George Hill said the results were strongly
disappointing and downgraded the company's stock to "neutral" from
"buy."

Hill said he was most troubled by the loss of long tenured CFO
Bill Davis, who had been the public face of Allscripts to investors for many
years.

"We suspect CEO Glen Tullman won a power struggle at the 11th hour
leading to the board departures," Hill said.

"Too few customers are
buying its products, due to lack of confidence or satisfaction," Barclays
Capital analyst Lawrence Marsh wrote in a note.

Allscripts shares were
trading at $9.27 in premarket trade. They had closed at $16.02 Thursday on the
Nasdaq.

(Reporting by Shailesh Kuber in Bangalore; Editing by Joyjeet
Das)

The statement 'too few customers are buying its products, due to lack of confidence or satisfaction', speaks volumes about the state of health IT in general in 2012.

That state includes eventual regulation after an IOM report on dubious safety, mission hostile user interfaces as identified by NIST and others that will require expensive remediation (due to the industry arrogantly ignoring this crucial issue for decades), 'glitches' due to poor or non-existent validation and quality control that will increasingly result in expensive litigation when patients are harmed, likely government investigations and clawbacks due to EHR-promoted upcoding, and an increasing awareness that many of the so-called miracle 'revolutionary' gains (as opposed to facilitation of medical practice) are largely illusory industry-promoted memes not based on robust, scientifically-generated evidence.

I'd pull out of this market - if I had any money invested in it. I have none, and never have, because I have great lack of confidence in the industry that began when I was first exposed to it and its leaders - that being in 1992.

I note that the HITECH component of ARRA, containing incentives and penalties related to health care information technology designed to accelerate the adoption of EHR systems, was advanced largely via advice to the President on the wonders of health IT. (I thought HITECH was a reckless, premature move destined to waste billions of dollars as did the erstwhile NPfIT in the NHS, and I still stand by that prediction.)

Health insurance giant WellPoint is the latest target of an increasingly aggressive campaign to force disclosure of corporate political and lobbying expenditures, including payments to the U.S. Chamber of Commerce, which has become more active in elections over the past decade.

The WellPoint campaign, set to be formally announced Thursday by a coalition of activist investor groups, demands the resignation of two WellPoint board members, including Susan Bayh, the wife of former senator Evan Bayh (D-Ind.), for allegedly failing to oversee 'high risk political spending.'

The shareholder coalition cited WellPoint’s reluctance to answer questions about a transfer of $86 million from the health insurers trade association to the U.S. Chamber of Commerce in 2010, when the Chamber was actively opposing President Obama’s health-care overhaul. WellPoint is a member of the association, America’s Health Insurance Plans.

'This is the most egregious clandestine campaign funding we have ever seen,' said Michael Pryce-Jones of the CtW Investment Group, a labor-affiliated organization that is part of the shareholders’ coalition, referring to the payments from the trade association to the Chamber of Commerce.

However,

At WellPoint, officials dismissed the notion that the company has been secretive about its political giving. On the contrary, spokeswoman Kristin Binns said, the firm discloses a great deal on its Web site.

'WellPoint complies with all disclosure requirements under federal, state and local laws,' she said, noting that the company publishes a 'very extensive' annual report on its political contributions.

But,

That report does not include details of the sort of special payment that the shareholders coalition said WellPoint made to the health insurers association.

So, to summarize, WellPoint management is accused of spending tens of millions on political lobbying while hiding the spending from the public and from the company's nominal owners, that is, its stock-holders, by laundering it through a third party.

WellPoint's Sorry Ethical Record

This is just the latest questionable behavior by WellPoint we have discussed. Previously, we have noted incidents in which the company ...

California Anthem Blue Cross subsidiary cancelled individual insurance policies after their owners made large claims (a practices sometimes called rescission). The company was ordered to pay a million dollar fine in early 2007 for this (see post here). A state agency charged that some of these cancellations by another WellPoint subsidiary were improper (see post here). WellPoint was alleged to have pushed physicians to look for patients' medical problems that would allow rescission (see post here). It turned out that California never collected the 2007 fine noted above, allegedly because the state agency feared that WellPoint had become too powerful to take on (see post here). But in 2008, WellPoint agreed to pay more fines for its rescission practices (see post here). In 2009, WellPoint executives were defiant about their continued intention to make rescission in hearings before the US congress (see post here).

California Blue Cross subsidiary allegedly attempted to get physicians to sign contracts whose confidentiality provisions would have prevented them from consulting lawyers about the contracts (see 2007 post here).

formerly acclaimed CFO was fired for unclear reasons, and then allegations from numerous women of what now might be called Tiger Woods-like activities surfaced (see post here).

announced that its investment portfolio was hardly immune from the losses prevalent in late 2008 (see post here).

was sanctioned by the US government in early 2009 for erroneously denying coverage to senior patients who subscribed to its Medicare drug plans (see 2009 post here).

settled charges that it had used a questionable data-base (builty by Ingenix, a subsidiary of ostensible WellPoint competitor UnitedHealth) to determine fees paid to physicians for out-of-network care (see 2009 post here).

violated state law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers, according to the California health insurance commissioner (see 2010 post here).

Braly, 50, received 2011 compensation valued at $13.2 million, according to an Associated Press analysis of the Indianapolis company's annual proxy statement. That represents a 2 percent drop compared with 2010.

Braly, who has served as CEO for nearly five years, received a $1.1 million salary in 2011, a total that has stayed flat since 2008. Her compensation also included a performance-related bonus of nearly $1.9 million, stock and option awards totaling about $10 million and $216,279 in other compensation.

While her compensation dropped 2%,

WellPoint's earnings fell in the final three quarters of last year compared with 2010, capped by a 39 percent drop in the fourth quarter. In total, the insurer's earnings sank 8 percent compared with 2010.

The compensation above did not take into account that

Braly also made about $6.9 million last year mostly from previously awarded restricted stock units that had vested.

Summary

WellPoint CEO Angela Braly, like many of her fellow top hired managers of health care organizations, has become more wealthy every year despite her company's record of questionable conduct, and out of proportion to her company's financial results.

Based on illusory promises of greater efficiency that would benefit everyone, we have handed health care over to large, increasingly for-profit organizations, and we have handed control over these organizations to hired managers. We have made these managers accountable to no one, so they seem to run their organizations to benefit themselves first. Is it any surprise that organizations run to benefit top insiders do not much benefit patients' or the public's health?

Maybe the campaign by some of WellPoint's nominal owners to at least make what the company pays to influence politics transparent is a tiny first step to making the leadership of health care organizations accountable both to the organizations' owners (when they exist) and to patients and the public at large. Until they become so accountable, do not expect any improvements in health care cost, quality or access.

Tuesday, April 24, 2012

Last week, Bloomberg reminded us of the legal baggage that pharmaceutical giant Merck is carrying. The company had announced yet another settlement of legal actions pertaining to its ill-starred but very profitable sales of now withdrawn Vioxx (rofecoxib) in 2011 (see post here). Now the settlement, including a guilty plea was accepted by a judge.

A unit of Merck & Co. (MRK), the second- largest U.S. drugmaker, pleaded guilty to a criminal misdemeanor charge as part of a $950 million settlement of a U.S. government probe of its illegal marketing of the painkiller Vioxx.

An official of Merck Sharp & Dohme said today that the company agreed to plead guilty to one count of misbranding Vioxx. U.S. District Judge Patti Saris in Boston accepted the plea as part of the drugmaker’s agreement to pay a $321.6 million criminal fine and $628.3 million to resolve civil claims that it sold Vioxx for unapproved uses and improperly touted its safety.

'I’m certainly going to accept this agreement because I think it’s in the public interest,' Saris said from the bench. 'I hope the size of this settlement and the fact that all these cases are being pressed by the federal and state governments -- the 44 states’ attorneys general -- will be a signal that this isn’t acceptable conduct.'

But unacceptable conduct can lead to a great deal of revenue. As Bloomberg noted,

Approved by the Food and Drug Administration in 1999, Vioxx became Merck’s third-largest-selling drug by 2003, generating $2.5 billion in annual sales. The company pulled Vioxx off the market in 2004 after a study found it posed an increased risk of heart attacks and strokes.

It can also lead to a great deal of personal profit for those at the company tasked with defending such "unacceptable conduct," and what has now been found to be criminal behavior. Writing in Slate, Snigdha Prakash, who wrote All the Justice Money Can Buy about the legal aftermath of Vioxx, identified the current Merck CEO and board chairman as the architect of the defense of Vioxx, as

best known for his phenomenal success in defending a sordid chapter in Merck’s recent past—its years-long silence about the safety problems of the popular painkiller Vioxx.

Furthermore, she wrote,

As he showed with the Vioxx litigation, Frazier is adept at mounting a scorched-earth defense that minimizes payouts to potential plaintiffs.

Tens of thousands of former Vioxx users sued Merck after it withdrew the drug, alleging Vioxx had caused them to suffer heart attacks and strokes. Frazier, then the company’s general counsel, declared Merck had done nothing wrong and refused to settle. 'We’ll fight every case,' he declared, and hired top-flight law firms in several East Coast cities, in the South, in Chicago, and Los Angeles, as well as a prominent New York firm to coordinate the overall strategy. It took three years and $2 billion in legal expenses for Frazier’s hard-nosed tactics to pay off. Merck settled in late 2007 for a relative pittance, resolving some 50,000 Vioxx cases for just under $5 billion. It was a far cry from the $25 billion to $50 billion in liability that analysts had predicted when Merck withdrew the drug.

So it appears that Mr Frazier is now reaping his rewards. The Dow Jones News Service reported earlier in April,

Merck & Co.'s (MRK) leader received compensation valued at $13.3 million for 2011, up 41% from the year before, reflecting his ascension to the drug maker's top post and Merck's ability to exceed certain internal performance targets.

Kenneth Frazier, 57, became Merck's chief executive at the beginning of 2011 and chairman of the board in December. He was previously head of Merck's human health business.

In a proxy statement filed Thursday with the U.S. Securities and Exchange Commission, Merck said certain elements of Frazier's compensation reflected growth in Merck's sales and adjusted earnings for 2011.

In addition, Merck's board considered 'his performance, leadership, planning and oversight during a time of continued economic, regulatory and political challenges for the healthcare industry.'

Earlier this year, Frazier acknowledged that Merck had a tough 2011. The company endured setbacks including negative clinical data for a once-promising heart drug, vorapaxar. Merck's full-year stock price performance lagged behind most of its large-pharmaceutical peers.

But Merck of Whitehouse Station, N.J., continued to cut costs and was able to raise its dividend for the first time in seven years in 2011. Frazier said in January he was optimistic about 2012.

Frazier's total compensation included: $1.5 million in salary, $3.1 million in stock awards, $3 million in option awards, $3.1 million in non-equity incentive plan compensation, and $2.6 million change in pension value and non-qualified deferred compensation earnings.

So somehow a "tough 2011" for Merck's stockholders (Merck's stock price rose a mere 3.9%, from 36.29 to 37.70 through 2011) resulted in a cornucopia of riches for Mr Frazier. So rather than being rewarded for "maximizing shareholder value," (see post here) maybe Mr Frazier was rewarded for, as Ms Prakash put it, "burying monumental corporate failures at Merck."

Here is the latest version of how top health care organizational insiders manage to make even more money no matter what, in this case, no matter what happens to the fortunes of the nominal owners of the company, no matter what happens to the company's once proud reputation, and particularly no matter what happened to the patients unfortunate enough to suffer adverse effects from its drug.

We will not be able to truly reform health care, to really improve outcomes, improve access, and control costs, until we hold the leaders of health care organizations accountable.

... In deciding what to do [in recent years], political leaders stopped dealing in
experience, evidence and compromise, and began dealing in faith-based –
almost religious – healthcare decision-making.
Of course in this context we’re not talking about “faith-based” in
its meaning of handed down from the one true God (or the many true Gods,
depending upon your religion), but instead faith-based in the sense of
having fixed and immutable beliefs about things like how to run
healthcare or, indeed, the whole country. It doesn’t matter what the
available evidence shows or what human experience has been, the
political religions of the left and right, Republicans and Democrats,
won’t tolerate alternative facts, strategies or explanations. Doing so
would be sacrilege, remediable only by human sacrifice.

The point of his post is that in the U.S. both political
parties have abandoned all pretense of listening to science or reason
and making compromises that benefit patients. They are making all
decisions on fervently-held, unshakeable ideological beliefs (and, I add
in some cases, for personal gain no matter the consequences to the
public).

I am reproducing the section of his essay on health IT, that illustrates his point well:

A third example is the sacrificial cult of electronic medical records.
[Sadly, that phraseology is all too apt - ed.] Except for those who work at Departments of Medical Informatics or as
physician “champions” for EMR vendors or health systems that are
spending billions to implement the darned things, the vast majority of
doctors and nurses will tell you that EMRs are a chainsaw to clinical
productivity and the amount of time that we actually spend listening to
and getting to know our patients and their problems. Non-vendor,
non-government studies that show that these systems save money or
actually improve clinical results are scarcer than hen’s teeth, yet not a
day goes by without having shamans in the Cult of EMR claim that we
will see miraculous increases in efficiency, reductions in cost,
improvements in health and a blooming of preventive medicine “any day
now”.

These claims are increasing in intensity and shamelessness. This is at a time when it is admitted by some of the most respected scientific bodies (e.g., National Research Council, FDA, IOM, NIST) that the technology does not support clinicians' cognitive needs, is in fact disruptive and hard to use, and reports of harm are appearing. Worse, they report - magnitudes of reported harm are unknown due to impaired information diffusion. The impairment is both due to lack of regulation and regulatory authorities to report to (which allows opportunism), as well as due to business IT-modeled legal contracts with IP-protection and defects gag clauses.

The cult has grown so powerful that has been able to force
clinics and hospitals to sacrifice themselves in the process; goaded by
the awards and penalties handed out for the presence or absence of
“meaningful use”. It’s no great revelation that is a new technology is
truly useful, beneficial and cost-effective, there is absolutely no
reason that a government would need to mandate its use or bribe people
to buy it. Dr. Scot Silverstein at the Health Care Renewal
blog has devoted his career to documenting the questionable engineering
and lack of clinical awareness that goes into these systems, but you
will not identify single iota of doubt in the pronouncements of the Office of the National Coordinatoror the politicians who are receiving funds and advice from the
“healthcare information technology” (HIT) industry.Their minds are
made up. Don’t confuse them with the facts.

I wouldn't say I've "devoted my career" to documenting the problems only. I've been spending considerable time now doing something about it. This includes, in part, advising attorneys on both sides of the Bar on the problems they need to be aware of.

This knowledge will likely benefit plaintiff's lawyers and injured patients far more than the defense. There is no defense for cybernetically harming people with poorly designed and implemented, experimental medical devices, used without patient informed consent, or for trying to conceal the malpractice via electronic legerdemain.

It is my belief that a fair share of cavalier health IT experimenters, dyscompetents and "creative medical history editors" responsible for the current shabby state (technically and ethically) of commercial HIT, a situation that could have been avoided via learning from the medical and technological past, will have a very unpleasant and costly time in the courtroom in future years.

The article is largely a hagiography of Cerner founder Neal Patterson:

North Kansas City is an unlikely place to launch a revolution in American health care. Yet here, amid the dilapidated grain elevators, fast food joints and vast green plains, the dream of using computers to keep you alive at a reasonable cost is battling onward. In a bunkerlike building built to withstand a direct hit by a category five tornado, 22,000 servers handle 150 million health care transactions a day, roughly one-third of the patient data for the entire U.S. Records of your blood pressure, cholesterol, lab test results, that gallbladder surgery last year—and how much you paid for it—may sit there right now. Armed guards stand watch.

This is a data center at the headquarters of Cerner, the world’s largest stand-alone maker of health IT systems—and company number 1,621 on FORBES’ Global 2000 list—where the blood-and-guts realities of medicine meet the ­sterile speed and exactitude of the computer revolution.

Omitted are some pertinent negative accounts, such as Cerner's role in the failed £12.7bn ($20bn U.S.) National Programme for IT in the NHS (NPfIT), as described here and here.

Patterson is quoted with the standard industry bellicose grandiosity and hysterics about computers "revolutionizing" (as opposed to facilitating) medicine:

... In 1999 a report from the prestigious Institute of Medicine gave Patterson hope that the rest of medicine was ready to follow in Mayo’s footsteps. Titled “To Err Is Human,” the report detailed how between 44,000 and 98,000 people die every year in hospitals from preventable mistakes, like getting the wrong medicine or the wrong dose of the right one. The ­report specifically prescribed better computer systems as a way to prevent these deadly mistakes. Patterson cites that study as the moment when health IT entered the mainstream. But it was still slow going, and that drove him nuts. His customers at that time were more worried about the Y2K bug than they were about revolutionizing health care.

I first heard him and other HIT CEO's uttering the "revolution" line at a Microsoft Healthcare Users Group meeting ca. 1997 and attended largely by IT technicians. I was probably the only Medical Informatics-trained professional in attendance, and perhaps the only physician there.

There are a few Ddulite-ish quotes from Eric Topol and David Bates in an article with a clear tone of exalting health IT.

I am quoted in the Forbes article in about the only comment critical of health IT, and the only comment concerning the ethics of human subjects experimentation conducted with this technology, as it exists in 2012:

... the Hippocratic oath says nothing about breaking eggs to make omelets. “We’re kind of headed in the wrong direction,” says Scot Silverstein, a health IT expert at Drexel University who believes that the current systems are too prone to randomly losing data[I had citedthis study- ed.]and complicating doctors’ lives.

While the "breaking eggs to make omelets" metaphor was not mine, it reminded me that I just carried out my final earthly duty for my mother, injured in mid 2010 by a health IT-related error and deceased since June 2011. I filed her final IRS tax return yesterday, the due date.

I just hope my mother is enjoying her omelet in the Pearly Gates Diner. Scrambled eggs were about all she could eat well after the health IT accident.

As a result of that experience, my new business card (phone # redacted):

(Click to enlarge)

I no longer merely write about health IT risks. I find past involvement with attorneys early in my medical career, as Manager of Medical Programs and Medical Review Officer (drug testing officer) for one of the largest public transit authorities in the United States, quite helpful in this new role.

The "eggs that get broken", as in a well known old nursery rhyme from the early 1800's, cannot be reassembled. Those injured or killed in the unregulated, thoughtless, cavalier journey to some mystical medical cybernetic utopia deserve justice, and the eggheads responsible for their harms have earned the privilege of explaining themselves in the courtroom and being properly penalized where appropriate.

We have often noted that stories about problems with the leadership and governance of health care tend to be anechoic. That is, they tend to get less notice and generate less discussion than their content would seem to warrant. We have postulated that this has to do with fear of offending the rich and powerful who now lead and govern health care organizations, and the benefits, which may be produced by conflicts of interest, of maintaining good relationships with the rich powerful.

Did a Newspaper Delay a Story Unfavorable to its Prospective Buyer?

A story that has been emerging in bits and pieces over the last two months shows the sort of complex machinations that may generate the anechoic effect.

In February, 2012, a New York Times story raised questions about how a bid to purchase a big city newspaper by a group of well-connected and wealthy buyers would affect news coverage. The big city newspaper was the Philadelphia Inquirer. The group bidding to buy it was:

made up of the area’s most powerful Democrats.

Edward G. Rendell, the former Philadelphia mayor and Pennsylvania governor leads the group, which includes George E. Norcross III, a Democratic powerbroker in South New Jersey;...

The Times suggested that the Inquirer's coverage was being influenced by the proposed buyers before they had completed the sale:

Last week, Gregory J. Osberg, chief executive and publisher of the Philadelphia Media Network, which publishes The Inquirer, The Daily News and Philly.com, summoned the news organization’s three most senior editors to his office.

Over three hours, he told them he would be overseeing all articles related to the newspapers’ impending sale. If any articles ran without his approval, the editors would be fired, according to several editors and reporters briefed on the meeting who did not want to be identified criticizing the company’s leadership.

In a telephone interview Wednesday morning, Mr. Osberg said the meeting did not happen. But Larry Platt, editor of The Daily News and one of the editors in attendance, said that it did. Late Wednesday, Mr. Osberg acknowledged that the meeting had taken place but denied interfering in the editorial decisions, saying he only wished to be notified of further coverage. Mr. Platt declined to comment on specifics, but said, 'We fought for what we believed in,' referring to editorial independence, 'and we didn’t get all that we wanted.'

A Story About Who Benefits from How a Hospital is Lead

This is directly relevant to the anechoic effect in health care. Per the Times,

An investigation about conflicts of interest among board members of the Cooper University Hospital in nearby Camden, N.J., remains unpublished after months. Mr. Norcross serves as the hospital’s chairman.

In an e-mail Mr. Norcross, who has called The Inquirer and The Daily News in the last week to discuss other coverage, said the reporter’s research 'contained significant factual errors and incomplete data about the hospital and health care industry.'

The allegedly suppressed story finally came out in late March. In its published form it implied that Mr Norcross had an outsized influence on hospital operations, the hospital had business relationships with people who donated to political causes and organizations favored by Norcross, the hospital seemed to disproportionately benefit from government money and actions, and the hospital's board was afflicted by numerous conflicts of interest.

Norcross' Influence on Hospital Management

Per the Inquirer,

With Cooper suffering from record deficits, Norcross, then a top executive at Commerce Bank, helped bring the hospital back from the brink in 1999 when he arranged for the bank to lend it $8 million.

Since then, Norcross has put his imprint all over Cooper, from its lavish marketing, to its competitive fight to lure doctors, to its recent $450 million construction boom, to the political figures who work at Cooper and serve on its board.

Just as he was one of the first pols to spend heavily on television ads for lowly county races, Norcross was among the first to sell a hospital on TV, deploying Kelly Ripa as Cooper's pitchwoman. As it happens, she's the daughter of Joseph Ripa, the Democratic Camden County Clerk.

The milestones have been coming faster. The medical school, a must-have for any hospital with big ambitions, is finally gearing up. This year, work began on a $100 million cancer center.

The concern is that Mr Norcross was influencing operations in ways that happened to benefit his interests. Note that this contrasts with a number of cases we have discussed in which health care organizations' boards often seen too deferential to the organizations' hired leaders.

Hospital's Relationships with Political Donors

The Inquirer reported these instances,

With its heavy capital spending and big operating budget, Cooper has become an economic powerhouse. It throws off millions in fees and contracts.

Consider Cooper's heavy borrowing to pay for all that expansion. In the last decade, Cooper's bond sales have generated $5.1 million in fees to a variety of law firms, title companies, and financial advisers. On top of that, the hospital has handed out big-ticket contracts for other legal work, such as malpractice defense, its public disclosures show.

Many of those who received work via Cooper are major political donors, giving across the state to both parties. But they have been especially generous in Camden County, Norcross' home base.

During the last decade, firms involved with Cooper have given more than $1.5 million to Camden County Democrats.

As an example, lawyers at Cozen O'Connor, a Philadelphia firm that worked on four Cooper bond issues, have given Camden Democrats $115,060 since 2002. That represented more than 70 percent of its local political contributions in New Jersey. A Cozen spokeswoman said all donations reflected candidates' merits.

In interviews, Norcross conceded he had input into who was selected to work on hospital bond issues, managed by state and local authorities.

'Have I made recommendations of quality firms?' he said. 'Absolutely.'

But he insists that firms are selected solely on ability and that political donations were irrelevant.

"These people have been making major, sizable donations to the Democratic Party in this region long before any bond issue," he said.

Lawyers offer varying explanations for their giving.

Attorney Steven Weinstein, formerly with the Philadelphia firm of Blank Rome, has given steadily to South Jersey Democrats over the years, public records show. His giving hit a peak, in 2004 when he gave $30,000 to the Camden County Democratic Committee.

The following year, Blank Rome was named one of four law firms to work on a $135 million Cooper bond issue, representing the investment firm Goldman Sachs.

In the six years since, Weinstein's donations to Camden County Democrats came only to $2,850.

Weinstein said his donations had no connection to Blank Rome.

But David Lebor, another former Blank Rome partner who joined Weinstein in making Camden County donations in 2004, said the firm would sometimes request that lawyers make specific contributions. Lebor said he didn't know the firm's motives for making requests. 'I don't ask those questions,' he said.

The implication is that Mr Norcross was using his control over the hospital to fulfill his political agenda.

Favorable Relationships with Government

The Inquirer documented instances which seemed to show that the hospital seemed to be treated disproportionately well by government, for example,

Late last year, the Delaware River Port Authority, its once-vast development kitty finally running dry, approved its last round of project spending. Among the lucky few recipients: Cooper University Hospital. It got $6 million for the cancer center.

No other hospital in New Jersey or Pennsylvania has ever received DRPA assistance, the authority says.

The DRPA money was one of many ways in which Cooper has benefited from government action during the Norcross era. This year, Cooper received $52 million in state funding, more than any hospital in South Jersey - and in the top five for all 72 New Jersey hospitals.

And U.S. Rep. Rob Andrews (D., Camden) has set aside $640,000 in federal earmarks for Cooper over the last decade, the most of any hospital in his district. Another Camden hospital, Our Lady of Lourdes, received nothing.

The Board's Conflicts of Interest

The Inquirer article noted,

[Cooper Health System CEO John P] Sheridan's old law firm, Riker Danzig Scherer Hyland & Perretti L.L.P., has been a paid lobbyist for Cooper for at least a decade. More recently, the hospital put another firm on its roster.

It didn't look far to make the hire.

In 2010, Cooper added Republican lobbyist Jeff Michaels to the team. In another lobbying venture, he is the partner of [George] Norcross' brother Philip.

The hospital has paid the firm solely operated by Michaels $180,000 over the last two years.

Beyond that,

As Cooper has spent its millions, hospital insiders have frequently been on the receiving end.

From 2008 to 2010 Cooper paid more than $40 million to companies tied to the hospital's board of trustees, according to public-disclosure documents the hospital filed with the IRS.

$1.8 million to the Parker McKay law firm, where Philip Norcross is the firm's chief executive.

$4.6 million to the former Commerce Bank and its successor, TD Bank. Norcross and a former Cooper board member were top executives at Commerce.

$277,000 to Riker Danzig, where Sheridan was once a law partner.

But of the millions in payments, the largest share - $33 million - went to a joint venture between international construction giant Turner Construction and HSC Construction and Builders in Exton.

Former board member Edward Viner's son, Jim, serves as president of HSC.

Most of the money was passed through to subcontractors and the joint venture was paid $2.8 million in fees, Cooper said.

In 2008 and 2009, the last years for which regional data were available, Cooper initially reported more of what the IRS calls 'Interested Persons' transactions than any hospital in the Philadelphia area.

This again suggests that the hospital may be run such that board members' financial interests are put ahead of other concerns.

The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.

-Duty of Loyalty

The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.

-Duty of Obedience

The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission.

The delayed Inquirer story suggests that instead, those who are supposed to steward large health care organizations may be putting their own interests, political or financial, ahead of the mission, potentially violating their duties of loyalty and obedience. This story corroborates questions we have been raising about who now are the stewards of health care organizations, and to what ends.

However, this particular story appears to have been delayed, and perhaps diluted, because of the power wielded by the sorts of people who now are supposed to be stewards of health care organizations. This shows how powerful insiders not only are distorting health care to fit their own agendas, but that they may be smothering the discussion of this vitally important issue.

We will not be able to truly reform health care until we can freely discuss what has gone wrong with it.

Tuesday, April 17, 2012

During the brief Occupy Wall Street etc campaign last year, the pepper spraying of unarmed protesters on the University of California - Davis campus became a symbol for some of what the powers that be thought of those who challenge the political economic status quo. We discussed this incident (here and here) on Health Care Renewal as an example of how the privileged hired leaders of big organizations, including health care organizations, may put their own interests ahead of the organizations' missions. Note that this case is relevant to Health Care Renewal since UC- Davis has a medical school and academic medical center.

The Task Force Report

Now, five months later, an internal investigation of the case has been made public, and it seems to support our concerns about the leadership of large organizations. The AP described the resulting report (via the Seattle Post-Intelligencer). In summary,

a UC Davis task force said the decision to douse seated Occupy protesters with the eye-stinging chemical was 'objectively unreasonable' and not authorized by campus policy.

'The pepper-spraying incident that took place on Nov. 18, 2011, should and could have been prevented,' concluded the task force created to investigate the confrontation.

The report concluded that the Chancellor (functionally, the CEO) of UC-Davis, Linda Katehi had substantial responsibility for the incident:

The task force blamed the the incident on poor planning, communication and decision-making at all levels of the school administration, from Katehi to Police Chief Annette Spicuzza to Lt. John Pike, the main officer seen in the online videos.

Furthermore,

The task force blamed the chancellor for not clearly communicating to her subordinates that police should avoid physical force on the protesters. It also said she was responsible for the decision to deploy police on a Friday afternoon, rather than wait until early morning as Spicuzza recommended.

An editorial in the Merced Sun-Star focused more vividly on Katehi's poor leadership.

The independent assessment of events leading up to the infamous Nov. 18 pepper-spraying incident at the University of California at Davis provides a devastating indictment of the leadership of Chancellor Linda P.B. Katehi and key vice chancellors -- and of the operations of the campus Police Department.

Katehi showed either extreme naivete or incompetence in weighing a response to protesters camping in the Quad. The report of the task force, led by former California Supreme Court Associate Justice Cruz Reynoso, revealed a deeply flawed structure for decision-making. Little or no consideration of alternatives. Failing to record and adequately communicate key decisions, so that ambiguity and uncertainty ruled.

The command and leadership structure of the campus Police Department, the report concluded, is 'very dysfunctional.' Lieutenants, the report stated, don't 'follow directives of the Chief.' This department needs a top-to-bottom review to bring it into line with best practices in policing for a university campus.

Campus leaders had been dealing with protests since 2009 and were well aware of events that November in Oakland and at UC Berkeley.

But instead of deliberate preparations, those events, according to the report, sparked alarmist fears among Katehi and other administrators that if any encampment was not removed immediately, older non-students might assault young female students.

Katehi said she was worried about 'the use of drugs and sex and other things, and you know here we have very young students ... we were worried especially about having very young girls and other students with older people who come from the outside without any knowledge of their record ... .'

But the report suggests Katehi and her leadership team did little or nothing to verify whether these fears were well-founded, ignoring evidence from student affairs staff that protesters were students and faculty. The report concludes that Katehi's fears were 'not supported by any evidence' obtained by the Kroll Inc. investigators.

Worse, even if the concerns were real, Katehi and her leadership team did not consider alternatives to immediate removal of the encampment -- or learn anything from the experience of other places. This rush to action resulted in ad hoc decision-making, apparently with no one having a clear understanding of what was supposed to happen.

Katehi did make one thing clear: She wanted the tents removed at 3 p.m. -- though it was never certain what legal authority police had to remove tents during the day in order to implement a policy against overnight camping. Subordinates, the report says, took her statement as an executive order and tactical decision.

The report also notes that Katehi 'failed to express in any meaningful way her expectation' that campus police would use no force. There is no indication what Katehi thought police should do if protesters refused a request to take down tents.

Furthermore, an article in the Atlantic suggested that Katehi was not truthful in her dealing with the investigation:

at face value ... [the report's] findings are also very damaging to the still-serving Chancellor of UC Davis, Linda Katehi. For instance, the Kroll report says about a letter asking the demonstrators to disperse:

Chancellor Katehi told Kroll investigators that Student Affairs wrote the letter and that she did not review it before it went out. The record contradicts both of these statements, as detailed below. Katehi did review the letter, provided an editorial change and approved it. Student Affairs did not write the letter...

Will Leadership be Held Accountable?
So, in summary, the report on the pepper-spraying incident portrays the Chancellor of UC-Davis as presiding over a dysfunctional police department, hastily responding to rumors rather than evidence, making decisions without considering alternatives, poorly communicating decisions and their rationale, and not always being honest. This is not the portrait of a capable leader. This a a portrait of someone totally out of her depth.

So why is she paid the big bucks? As we have discussed endlessly, the top hired leaders of big health care (and other related) organizations seem to be almost universally lauded by their boards of trustees, not to mention fawning public relations departments, as brilliant. That brilliance is used as a rationale for the leaders' compensation and benefits, and for deflecting their accountability.

Yet often on close examination top hired leaders prove to be bumblers at best. Again and again their leadership has been shown to subvert the mission of their own organizations. Yet the structure that has been erected to protect them, to put them into a "CEO bubble," keeps them unaccountable.

Even after this report, will Chancellor Katehi be held accountable? Once again, I am not holding my breath. The strength of her protective bubble was demonstrated in an article in the Sacramento Bee,

Cruz Reynoso, the former state Supreme Court justice whose task force blamed 'systemic and repeated failures' of UC Davis' leadership for the pepper-spraying of students last fall, said Thursday that Chancellor Linda P.B. Katehi should stay on the job and enact reforms to prevent a recurrence.

'She should not resign. The balance is that she has done a lot of good despite this drastic poor judgment,' Reynoso said, a day after releasing an investigative report that faulted the chancellor for failing to make clear to campus police she wanted no force used in dispersing protesters and taking down an Occupy encampment on Nov. 18.

Reynoso said he was impressed by the chancellor's response: a written statement Wednesday vowing to protect students' 'safety and free speech' as the university learns 'from the difficult events.'

What an example of cognitive dissonance this was. "Systematic and repeated failures," and "drastic poor judgment," which resulted in injuries to students and clear violation of the university mission is not reason enough to fire a CEO (as long as she writes a contrite letter promising to uphold the mission in the future)? There is no way to understand this other than as a manifestation of belief in the "divine right of CEOs" (look here and here).

So my response is that we will not solve the problem of health care dysfunction, and our society's larger political economic problems until we resolve to hold our leaders accountable for the missions they are supposed to uphold.

Friday, April 13, 2012

The latest legal black eye for giant pharmaceutical and device company Johnson and Johnson appeared in an Arkansas court room. As documented by Bloomberg, via NJ.com,

Johnson & Johnson was ordered to pay $1.1 billion by a state judge after an Arkansas jury found the company’s officials misled doctors and patients about the risks of the antipsychotic drug Risperdal.

Jurors in Little Rock yesterday said the company’s marketing campaign also violated consumer-protection laws. The panel deliberated about three hours before finding J&J and its Janssen unit engaged in 'false or deceptive acts' by sending a 2003 letter touting Risperdal as safer than competing drugs to more than 6,000 doctors across the state.

The prosecutors had alleged a variety of kinds of deceptions about Risperdal,

Along with contending that J&J and Janssen defrauded the Medicaid program by failing to properly outline the antipsychotic medicine’s risks, Arkansas officials alleged J&J officials deceptively marketed the drug as safer and better than competing medicines.

The state also argued the companies marketed the drug for 'unapproved uses, including various symptoms in children and the elderly' after being warned by federal authorities to halt such sales.

In summary,

Arkansas Attorney General Dustin McDaniel said in an e- mailed statement that he sued because residents in the state deserved to be protected from 'fraud and deceptive practices.'

He said that jurors found 'Johnson &Johnson and Janssen Pharmaceuticals lied to patients and doctors because they cared more about profits than people.'

Bloomberg noted that

It’s the third jury verdict against J&J, the second-biggest maker of health products, in cases where states alleged it hid Risperdal’s risks and tricked Medicaid regulators into paying more than they should have for the medicine. Louisiana and South Carolina juries also found the company’s Risperdal marketing violated consumer-protection laws.

In fact, this is just the latest in a remarkable string of legal cases suggesting an ongoing pattern of unethical and illegal behavior by this very large health care corporation. As we wrote recently, this included
- Convictions in two different states in 2010 for misleading marketing of Risperdal, as noted above
- A guilty plea for misbranding Topamax in 2010
- Guilty pleas to bribery in Europe in 2011 by J+J's DePuy subsidiary
- A guilty plea for marketing Risperdal for unapproved uses in 2011 (see this link for all of the above)
- Accusations that the company, which makes smoking cessation products, participated along with tobacco companies in efforts to lobby state legislators (see post here)
- A guilty plea to misbranding Natrecor by J+J subsidiary Scios (see post here)
- More recently, in 2012, testimony in a trial of allegations of unethical marketing of the drug Risperdal (risperidone) by the Janssen subsidiary revealed a systemic, deceptive stealth marketing campaign that fostered suppression of research whose results were unfavorable to the company, ghostwriting, the use of key opinion leaders as marketers in the guise of academics and professionals, and intimidation of whistleblowers. After these revelations, the company abruptly settled the case (see post here).
- Most recently, there are reports that the company is in negotiation with the US Department of Justice to settle other lawsuits about the marketing of Risperdal, perhaps for as much as $1.8 billion (see this BusinessWeek story.)

Meanwhile, as we also discussed recently, Johnson and Johnson seems to have lost the ability to manufacture high quality products. It has had to make 30 separate product recalls since 2009. The latest was Liquid Infant Tylenol. (The current WSJ Health Blog list of recalls can be found here.)

So the real question here is how many instances of manufacturing of defective, mislabeled, contaminated, or harmful products, and how many court cases showing unethical or illegal behavior will it take until the leadership and governance of this company improves (and by extension, the leadership and governance of other large health care corporations with similar bad records improves).

As we posted not long ago, the CEO who presided over most of these messes will be allowed to retire with a huge golden parachute. His devotion to "making the numbers," that is, hitting short-term revenue targets ahead of all other goals, probably had something to do with a company once thought of as a paragon of corporate behavior turning so bad. Yet he became extremely rich doing this, and neither his riches nor his legal status have ever been challenged. His successor apparently will be another former sales representative who may be just as devoted to "making the numbers,." Thus has the business school dogma that short-term financial results, prettied up as "shareholder value," is the only thing that should matter to corporate leadership (look here) poisoned health care.

How many more doctors and patients have to be deceived, how many products have to be contaminated or defectively made before we demand better leadership of health care organizations?

Wednesday, April 11, 2012

Over the last two weeks, the Naked Capitalism blog ran a multi-part series (1-4) on what has gone wrong with US public for-profit corporations. Although not targeted specifically on health care, the series included several themes we have discussed on Health Care Renewal, and suggested some important new ones. So let us review the most relevant topics.

"Financialization," and the Exclusive Ostensible Focus on Shareholder Value

In the first post,(1) William Lazonick explained how corporations gave up their devotion to societal values to ostensibly focus only on the interests of shareholders:

What went wrong? A fundamental transformation in the investment strategies of major U.S. corporations is a big part of the story.

A generation or two ago, corporate leaders considered the interests of their companies to be aligned with those of the broader society. In 1953, at his congressional confirmation hearing to be Secretary of Defense, General Motors CEO Charles E. Wilson was asked whether he would be able to make a decision that conflicted with the interests of his company. His famous reply: 'For years I thought what was good for the country was good for General Motors and vice versa.'

However, then(1)

the U.S. business corporation has become in a (rather ugly) word 'financialized.' It means that executives began to base all their decisions on increasing corporate earnings for the sake of jacking up corporate stock prices. Other concerns — economic, social and political — took a backseat. From the 1980s, the talk in boardrooms and business schools changed. Instead of running corporations to create wealth for all, leaders should think only of 'maximizing shareholder value.'

This was formalized in the the scholarly management literature,(1)

But in 1983, two financial economists, Eugene Fama of the University of Chicago and Michael Jensen of the University of Rochester, co-authored two articles in the Journal of Law and Economics which extolled corporate honchos who focused on 'maximizing shareholder value' — by which they meant using corporate resources to boost stock prices, however short the time-frame. In 1985 Jensen landed a higher profile pulpit at Harvard Business School. Soon, shareholder-value ideology became the mantra of thousands of MBA students who were unleashed in the corporate world.

Maximizing shareholder value only really seems to mean maximizing shareholder value in the short run, often by short-term cost-cutting that will reduce the ability to improve existing or develop new products and services. Hence, now(1)

When the shareholder-value mantra becomes the main focus, executives concentrate on avoiding taxes for the sake of higher profits, and they don’t think twice about permanently axing workers. They increase distributions of corporate cash to shareholders in the forms of dividends and, even more prominently, stock buybacks. When a corporation becomes financialized, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards for all. They become focused instead on generating financial profits that can justify higher stock prices....

Furthermore,(1)

n the name of shareholder value, by the 1990s U.S. corporations seized on these changes in competition and technology to put an end to the norm of a career with one company, ridding themselves of more expensive older employees in the process. In the 2000s, American corporations found that low-wage nations like China and India possessed millions of qualified college graduates who were able and willing to do high-end work in place of U.S. workers. Offshoring put the nail in the coffin of employment security in corporate America.

Thus, "maximizing shareholder value" was the rationale for a variety of short-term cost-cutting approaches that turned employees (excepting, of course, the hired executives and their favorites) not merely into the makers of widgets, but into widgets themselves. By extension, this attitude that all employees (again, with the exception of top management and their cronies) are interchangeable applied even to highly skilled professional, technical and scientific employees, e.g., research scientists in a pharmaceutical company.

By further extension, as we have noted, health care organizations, including non-profit institutions like hospitals, insurance companies, and academic medical institutions, have been taken over by hired managers who are decreasingly health care professionals. Such hired generic managers have carried the latest fashionable management ideas into health care with them. Thus, in my experience, even experienced academic physicians began hearing that they had no individual value, were interchangeable and could easily be replaced starting in the 1990s.

For organizations that depend on highly trained, dedicated technical, scientific, and/or professional workers, devaluing and demoralizing such employees wold appear to be the height of foolishness.

As Lazonick pointed out in a later post(3), treating workers as interchangeable can be the death knell for innovation:

As is generally recognized by employers who declare that 'our most important assets are our human assets', the key to successful innovation is the extra time and effort, above and beyond the strict requirements of the job, that employees expend interacting with others to confront and solve problems in transforming technologies and accessing markets. Anyone who has spent time in a workplace knows the difference between workers who just punch the clock to collect their pay from day to day and workers who use their paid employment as a platform for the expenditure of creative and collective effort as part of a process of building their careers.

As members of the firm, these forward-looking workers bear the risk that their extra expenditures of time and effort will not yield the gains to innovative enterprise from which they can be rewarded. If, however, the innovation process does generate profits, workers, as risk-bearers, have a claim to a share in the forms of promotions, higher earnings and benefits. Instead, shareholder-value ideology is often used as a rationale for laying off workers whose hard and creative work has contributed to the company’s success. That’s grossly unfair.

A Fallacious Rationale: Only Stockholders at Risk

However, the reasoning, such as it was, behind the "maximizing shareholder value" mantra contained a rationale for so devaluing and demoralizing even the most dedicated and well-trained employees. As Prof Lazonick explained,(1)

Proponents of the Fama/Jenson view argue that for superior economic performance, corporate resources should be allocated to maximize returns to shareholders because they are the only economic actors who make investments without a guaranteed return. They say that shareholders are the only ones who bear risk in the corporate economy, and so they should also get the rewards.

He then went on to easily explain why this was complete rubbish(1):

But this argument could not be more false. In fact, lots of people bear risks of investing in the corporation without knowing if they will pay off for them. Governments in the U.S., funded by the body of taxpayers, are constantly making investments in physical infrastructures and human capabilities that provide benefits to businesses, but without a guaranteed return to taxpayers. An employer expects workers to give time and effort beyond that required by their current pay to make a better product and boost profits for the company in the future. Where’s the worker’s guaranteed return? In contrast, most public shareholders simply buy and sell shares of a corporation on the stock market, making no contribution whatsoever to investment in the company’s productive capabilities.

By Extension, In Health Care, Ignoring the Interests of Patients and the Values of Health Care Professionals

If one believes only stockholders are at risk and hence only stockholders deserve benefit from corporate activities, by extension this eliminates the interests of patients and the values of health care professionals from consideration by the leadership of health care corporations.

Of course, in health care, the patients may be the ones most at risk from corporate activities. For example, think of a patient who pays a large amount out of pocket for a drug that fails to benefit him or her. Worse, patients are not only at financial risk, but are at physical risk. For example, think of a patient who suffers an unusual, but severe adverse reaction to a drug.

In addition, in health care, health care professionals who do not work for a particular health care corporation may be at risk from its activities. For example, think of a physician who is fooled by a pharmaceutical company's manipulation of clinical research into believing a drug is effective and safe when it is actually useless and harmful. We have documented numerous instances of suppression of clinical research, manipulation of clinical research, ghost writing, deceptive stealth marketing, and other tactics used by pharmaceutical, biotechnology and device companies to deceive physicians about the effectiveness and safety of drugs and devices. Physicians who have been thus deceived are at risk of violating their fundamental responsibility to put individual patients' interests first.

Subverting the Mission of Non-Profit Health Care Organizations

As we mentioned earlier, there is ample evidence that non-profit organizations are now most often lead by hired managers who have brought the latest management with them, rather than health care professionals. It is therefore likely that the dominant notion of "maximizing shareholder value" has been operationalized even in non-profit organizations that do not have shareholders.

Most likely it has been transformed into simply maximizing short-term revenue. We have certainly seen many instances of leaders of such health care organizations who seem mainly preoccupied with short-term financial goals. Bad as this is for a public for-profit corporation, it is potentially disastrous for a non-profit organization which is supposed to put upholding its mission ahead of financial concerns (see examples of such mission-hostile management here).

Interests of Shareholders or Interests of Executives?

It is terribly ironic that in practice "maximizing shareholder value" turns out to mean maximizing executive compensation. In retrospect, this mantra looks entirely self-serving. As Prof Lazonick noted in a second post, executive compensation has soared in recent years(2)

When all the data from corporate proxy statements are in within the next month or so, they will show that 2011 was another banner year for top executive pay. Over the previous three years the average annual compensation of the top 500 executives named on corporate proxy statements was 'only' $17.8 million, compared with an annual average of $27.3 million for 2005 through 2007. Yet even in these recent 'down' years, the compensation of these named top executives was more than double in real terms their counterparts’ pay in the years 1992 through 1994.

It might surprise you to learn that in the early 1990s, executive pay was already widely viewed as out of line with what average workers got paid. In 1991 Graef Crystal, a prominent executive pay consultant, published a best-selling book, In Search of Excess: The Overcompensation of American Executives, in which he calculated that over the course of the 1970s and ’80s, the real after-tax earnings of the average manufacturing worker had declined by about 13 percent. During the same period, that of the average CEO of a major US corporation had quadrupled!

In fact, as Prof Lazonick noted in his first post(1), by increasing stock prices short-term, executives of for-profit corporations can markedly boost their own compensation,

When a corporation becomes financialized, the top executives no longer concern themselves with investing in the productive capabilities of employees, the foundation for rising living standards for all. They become focused instead on generating financial profits that can justify higher stock prices – in large part because, through their stock-based compensation, high stock prices translate into megabucks for these corporate executives themselves.

The Conspiracy to Increase CEO Compensation

As CEO compensation climbed, they and their supporters have invoked a market-based rationale, as Prof Lazonick described in his third post,(3):

You often hear that stratospheric executive pay is the result of some inexorable law of supply and demand. If we don’t give top executives their multimillion dollar compensation, they won’t be willing to come to work and do their jobs. They are supposedly the bearers of 'scarce talent' that demands a high price in the market place. Even Robert Reich, Secretary of Labor in the Clinton administration and a critic of U.S. income inequality, has justified the explosion in executive pay, arguing that intense competition makes it much more difficult than it used to be to find the talent who can manage a large corporation (Supercapitalism, 2008, pp 105-114).

We have provided many examples of similar talking points used to support fat compensation for health care leaders (e.g., here. here, and here).
However, as we described here, the mechanism that executives have developed to set their own pay in line with the supposed market does nothing like that,(3)

That is not what determines executive pay. Here is how it works: Top executives select other top executives to sit on “their” boards of directors. These directors hire compensation consultants to recommend an executive pay package, which consists of salary, bonus, incentive pay, retirement benefits, and all manner of other perks. The consultants look at what top executives at other major corporations are getting, and say that, well, this executive should get more or less the same. Since the directors are mostly these very same “other executives”, they have no interest in objecting – and if any of them were to do so, they would find that they are no longer being invited to sit on corporate boards.

Meanwhile, given the preponderance of stock-based compensation (especially stock options) in executive pay, whenever there is speculative boom in the stock market, top executives of the companies with most rapidly rising stock prices make out like bandits. The higher compensation levels then create a 'new normal' for executive pay that, via the compensation consultants and compliant directors, ratchets up the pay of all the top dogs. And, when the stock market is less speculative, these corporate executives do massive stock buybacks to push stock prices up.

What we have here is not 'market forces' at work but an exclusive club that promotes the interests of the 0.1%. All too often executives allocate corporate resources to benefit themselves rather than to invest in innovation and job creation.

We have discussed similar mechanisms at work in health care, for example, here.

In other words,

almost unanimously, corporate executives proclaim that they run their companies for the sake of shareholders. In fact, their personal coffers pumped up with stock-based compensation, our business 'leaders' have increasingly run the corporations for themselves.

Were contemporary management of health care be only based on maximizing shareholder value or short-term revenue, that would be bad enough. However, it appears that it is really based simply on maximizing executive compensation. Health care, and our society as a whole has been turned into something like a feudal state, in which hired managers have become the new aristocracy.

The Rise of the Generic Manager

The likelihood that "maximizing [supposed] shareholder value" would lead to bad ends is increased by the decreasing likelihood that the managers who set out in this direction would know anything about the specific context in which they were working or other goals they ought to attempt. As Prof Lazonick pointed out, even before the rise of the "maximizing shareholder value" mantra,(1)

The beginnings of financialization date back to the 1960s when conglomerate titans built empires by gobbling up scores and even hundreds of companies. Business schools justified this concentration of corporate power by teaching that a good manager could manage any type of business — the bigger the better.

This was the notion of the generic manager. In health care, generic managers who have little specific health care knowledge or experience, and little understanding of or sympathy for the values of health care professionals might be particularly ruthless about putting short-term financial goals ahead of everything else.

Summary

On Health Care Renewal, we have focused on problems with health care leadership and governance. We have discussed the rise of generic managers, a focus on short-term revenue sometimes leading to mission-hostile management, the perverse incentives generated by executive compensation that is unrelated to achievement of the health care mission's goals, lack of executive accountability, and sometimes executives' complete impunity. It now appears that health care's leadership and governance problems simply reflect larger problems in the society as a whole.

Maybe it should be a relief that we in health care are not uniquely cursed. However, the immensity of the problems faced by our society as a whole will not make it easier to solve the problem of health care dysfunction.

I do feel better that our focus has been correct. Furthermore, I feel more confident asserting once again that true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.

Maybe realizing that health care's problems are a part of society's problems will lead to more support for their solutions.

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FIRM - the Foundation for Integrity and Responsibility in Medicine is a 501(c)3 that researches problems with leadership and governance in health care that threaten core values, and disseminates our findings to physicians, health care researchers and policy-makers, and the public at large. FIRM advocates representative, transparent, accountable and ethical health care governance, and hopes to empower health care professionals and patients to promote better health care leadership.

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